Consider an economy. The growth rate of nominal GDP in the recent year was 8% and...

Consider an economy. The growth rate of nominal GDP in the recent year was 8% and the growth rate of real GDP was 5%. What does such difference indicate? What do you think the government of this country should do next year?

Expert Solution

Nominal GDP is the money value of all final goods and services produced in an economy during a financial year. It is typically known as GDP.

Real GDP is the inflation adjusted money value of all final goods and services produced in an economy during a financial year. It is used to calculate the real growth of the economy by removing the distortions of inflation in nominal GDP.

Here growth rate of nominal GDP was 8% and growth rate of real GDP was 5%. Such change indicates that 3% of the country's growth rate is distorted by inflation. In other words if we calculate Gdp of that country by taking an year as base year, real growth rate of that year will be 5% instead of 8% as it is influenced by inflationary changes occurred in the current years.

The government of this country should plan and implement measures to check the inflation. Government can also initiate so many policies that brings Gdp growth rate up by increasing aggregate demand (consumption, investment, government expenditure ) with strict vigil on inflation.

Rahul Sunny answered 2 years ago

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